Israel’s beleaguered cellular companies got some rare relief at the end of last week when the Communications Ministry issued a statement signaling regulators would be offering some, as yet unspecified, help.
Shares of Cellcom Israel, the biggest of the operators went from a 10% drop on Thursday before the announcement was made to a 7.8% rise by closing time at 9.02 shekels ($2.59) on the Tel Aviv Stock Exchange. Partner Communications went from a 9% drop to a gain of 11% for the day to close at 13.89 shekels.
But the fact remains that the companies have seen their profits evaporate in the seven years since then Communications Ministry Moshe Kahlon instituted a package of free market reforms. Worse still, the three major players lack willing and/or able controlling shareholders.
“The problem of all the cellular companies today is simply that there are no owners on the telecommunications market. At Cellcom, [Eduardo] Elsztain is enmeshed in other matters and doesn’t deal much with Cellcom’s problems. [Haim] Saban has the money to invest in Partner but so far he isn’t doing it,” said one capital market source who asked not to be named.
“It’s not at all clear who would want to buy a telecom company given the level of risk and uncertainty in the market. Even when Bezeq was on the market there weren’t a lot of offers,” the source said.
The cellular industry’s problems go back to 2012 when the Kahlon reforms opened up the market, then controlled by Cellcom, Partner and Bezeq’s Pelephone unit, to competition. A host of smaller players quickly emerged, subscribers shopped around for the best deals and rates plummeted.
So did profits. In the next two years, Nochi Danker was forced to cede control of IDB group, the holding company that controlled Cellcom, in a debt bailout. Elsztain, an Argentinian real estate magnate, controls Cellcom to this day, but the IDB group remains in deep financial straits despite his injecting 2.7 billion of his capital into it.
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Ilan Ben-Dov, another tycoon, was forced to cell Partner to Haim Saban, the Israeli-American entertainment entrepreneur who made a fortune from the Power Rangers television series. Shaul Elovitch, who controlled Bezeq, was forced to give up control of his indebted empire in the face of a 2017 securities probe.
Since then, the Bezeq group has been without a controlling shareholder, although a group led by the U.S. private equity fund Searchlight Capital and Israeli David Fuhrer is close to acquiring control of Bezeq through its parent company B Communications.
Meanwhile, the situation for the big cellphone operators has gone from bad to worse. Since 2014, Cellcom has lost 80% of market capitalization to just 1.05 billion shekels. In 2019 alone, its shares have plunged 60%. At Partner, shares are down 24% this year and down 60% from their April 2014 high.
The Communications Ministry announcement on Thursday didn’t offer much in the way of details, but investors detected in it a change of attitude.
“The Communications Ministry has been closely monitoring over the past year, especially over the last week, the financial strength of the cellular companies,” it said.
“In light of recent developments, Communications Ministry Director General Nati Cohen ordered the formation of a special committee to investigate the cellular market. The committee will explore what can be done to ensure consumers get a variety of quality products at fair prices, where telecoms companies generate profits capable of enabling them to invest in 5G technology.”
Investors say they believe that the statement signals a new readiness by regulators to countenance mergers and acquisitions of the smaller players in the market.
“The day the government comes to understand it has no choice but to start approving mergers and acquisitions, the cellular industry will recover,” said one market source. “Today, the name of the game is to sit tight.”
Even Bezeq, the industry giant is already being treated more gently by the ministry, said one market source who spoke on condition of anonymity.
Asked why Searchlight and Fuhrer would be interested in an ailing business like Bezeq, the source said: “They’re making a great deal. They’re getting a company free of all its old baggage. The market is starting to see a change in regulators’ attitudes toward Bezeq. Something big has changed for regulators it seems and they’re not going to do anything to undo Bezeq’s historic monopoly.”
Cellcom’s problems are the most serious of the big companies. The company is carrying 2.4 billion shekels in debt, it’s overstaffed and has struggled to earn profits. Its bonds, whose rating was cut by S&P Maalot to A from A+ with a Negative outlook last week, are trading at 5-6.5%.
If those yields don’t come down, Cellcom will have a very difficult time recycling the nearly 2.2 billion shekels in debt due between now and 2022. The company has 1.4 billion shekels on its books, and S&P Maalot estimates it can generate another 400 million– 450 million in cash over the next 12 months.
Cellcom could raise equity capital, but it’s unlikely that Discount Investment Corporation, the IDB group company that directly controls it, would participate. Discount has 1.5 billion in cash, but it has its own debts to repay and bondholders are unlikely to approve Discount’s injecting more capital into Cellcom. The last time it did in a Cellcom share offering, it lost heavily.
Partner is in comparatively better shape. Its debt is about 1 billion shekels and its bonds trade at yields of about 3%. S&P Maalot last week lowered its credit outlook to Negative but kept its A-plus rating now.
“Partner has no cash flow problems because its debt is relatively low ….but it isn’t generating a lot of cash,” said one analyst, speaking without attribution.
Saban, whose fortune is estimated to be in the billions of dollars, could easily inject more capital into Partner, but it’s not clear that he wants to. He financed his 2012 acquisition of the company with a $300 million loan from the seller, Hong Kong’s Hutchison Communications.
For collateral, he pledged his 30% Partner stake, which today is worth considerably less than the value of the loan. If Saban opts against repaying and Hutchison takes back the shares, it will either have to apply for a new operating license from Israel or resell the stock on the open market – a move that would reduce their value further.